Three Tax Realities: Romney v. Obama v. Fiscal Cliff

October 3, 2012 -- intro: When President Obama and Mitt Romney throw their first face-to-face barbs of the 2012 campaign during tonight's presidential debate, there is one topic that is sure to cause some sparks: taxes.

Obama's theory that "everyone should pay their fair share" will face off against Romney's belief that "lower taxes and a simpler tax code" is the way to go. Complicating the conversation is the looming "fiscal cliff" of tax hikes and spending cuts that takes effect at the end of the year unless Congress -- which is bitterly divided on the correct solution -- intervenes.

So what would the world look like under a Romney presidency? How would tax rates change under a second Obama term? And what would most Americans pay if taxmaggedon came to pass?

The answer is complicated as policy experts disagree on the effects of each proposal, particularly because Romney has put out few details on his plan.

But here's a look at what Americans' tax forms will be saying this time next year under the three futures facing the country: A second Obama term, a change of power to a Romney presidency or the much-feared fiscal cliff.

quicklist: 1title: Scenario: Obama Winstext: In an Obama tax world, 95 percent of families will pay the same amount of income tax as they do now. Their tax rates will stay the same and their deductions will be largely unchanged.

But for the 5 percent of American families who earn more than $241,900 per year, Obama's tax plan means a fairly substantial tax hike.

Individuals earning between $200,000 and $500,000 will pay about $3,300 more in federal income taxes in 2013 than they did this year. Millionaires will pay an additional $184,600 per year, on average, according to an analysis by the nonpartisan Tax Policy Center.

The Details:

Obama's tax plan extends the Bush Tax Cuts for all families earning less than $241,900, but lets the cuts expire for families earning more than that. The tax rate on income between $241,900 and $390,050 will be 36 percent, or 3 percentage points higher in 2013 than it was in 2012. Couples who earn more than $390,050 will pay a 39.6 percent rate on income over that amount. That is 4.6 percentage points higher than their 2012 rate.

The tax on investment income like capital gains and dividends will increase for individuals earning more than $200,000 and families who earn more than $250,000. Instead of a 15 percent tax rate, dividends will be taxed like regular income subject to the 36 percent rate above $241,900 and 39.6 percent rate above $390,050, and the rate on capital gains will increase to 20 percent. The rates will stay at 15 percent on incomes less than $200,000.

Two-thirds of Obama's tax hikes fall solely on millionaires, who will pay higher rates on their income, capital gains and dividends. The president also plans to increase the estate and gift taxes from 35 percent to 45 percent on estates worth more than $3.5 million. Currently, these taxes only apply to estates worth more than $5 million.

Obama would extend tax credits for the working poor, child care, and having children.

On the corporate side, Obama proposes lowering the corporate tax rate from its current 35 percent to 28 percent and eliminate credits and exemptions, such as those for oil and gas companies.

The president's plan has been criticized for failing to address the growing debt and deficit. The Congressional Budget Office estimates Obama's plan will add $2.9 trillion to the federal debt over the next decade. In 2013 under Obama's proposal, the federal government will spend $977 billion more than it takes in.

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quicklist: 2title: Scenario: Romney Winstext: In a Romney tax world, most people's taxes would go down, with tax rates cut by 20 percent across the board.

For the average income earner who makes $50,000 per year, that means a $500 tax cut on average. People earning between $200,000 and $500,000, whose tax rates would go up under Obama, would save about $15,800 under Romney's tax plan, according to the Tax Policy Center's analysis.

About 10 percent of tax filers earning less than $100,000 would have to pay roughly $900 more because Romney's plan allows some tax breaks for low-income earners to expire, according to the Tax Policy center.

Details:

Romney's across-the-board rate reduction would make the lowest tax bracket begin at 8 percent (2 points lower than the current rate) and cap the highest bracket at 28 percent (7 points lower than the current rate).

People earning less than $200,000 would pay no taxes on investment income such as capital gains and dividends, while high income earners would retain their 15 percent rate. Romney would eliminate the estate tax.

For corporations, Romney would cut tax rates from the current 35 percent down to 25 percent, three points lower than Obama's proposed rate.

The GOP candidate plans to move to a "territorial" tax system where profits earned overseas are not taxed when they are brought back into the United States, even if the tax rate where they were earned is lower than the U.S. corporate tax rate.

Romney says he will make up for his proposed tax cuts -- which strip an estimated $456 billion from federal revenues per year -- by eliminating tax loopholes and deductions. While he has not specified all the credits he will cut, Romney said Tuesday he may cap the amount of deductions a taxpayer can claim, at, for example, $17,000.

There has been controversy between tax experts on whether there are enough loopholes and deductions to fully pay for his plan without raising taxes on the middle class.

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quicklist: 3title: Scenario: U.S. Falls Off the Fiscal Clifftext: If Congress fails to act, American taxpayers will be hit with $536 billion in tax increases and automatic spending cuts will strip $1.2 trillion largely from the Defense Department and Medicare.

In this fiscal cliff scenario, the average tax hike would be $3,446. Nearly 90 percent of families would see their taxes go up, with middle class taxes rising roughly $2,000 on average.

According to the Congressional Budget Office, if Congress does not prevent these provisions from expiring -- that is, if America falls off the fiscal cliff -- the country will plunge back into recession, with GDP growth slowing to a mere 0.5 percent.

Details:

On Dec. 31, the Bush Tax cuts are set to expire, raising taxes by between 4 percent and 6 percent on nearly every taxpayer. The lowest tax rate, which applies to families earning less than $17,800, will jump from 10 percent to 15 percent and the highest tax bracket, for households earning more than $397,000, will rise from 35 percent to 39.6 percent.

Tax credits that largely benefit low and middle income workers, such as the child tax credit and deductions for the working poor, will also expire.

Coupled with the tax hikes are steep and sudden spending cuts to the tune of $1.2 trillion next year. The Defense Department would bear the brunt of those cuts, losing $55 billion in funding for 2013.

Medicare would also take a big hit with the federal government cutting payments to Medicare providers by 2 percent in order to save $11 billion.

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